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BOJ eyes more easing, higher inflation target

A man walks past the Bank of Japan headquarters in Tokyo Dec. 19, 2012. If the BOJ eases again, it would be the first time for it to expand stimulus for two straight meetings since 2003

© Yuriko Nakao/REUTERS

The Bank of Japan will consider easing monetary policy again this month as it eyes doubling its inflation target, sources say, as weakness in the economy threatens to delay the country in getting out of deflation.

Any easing will likely take the form of another increase in the BOJ's ¥101-trillion ($11-billion) asset buying and lending program, mostly for purchases of government bonds and treasury discount bills, sources familiar with its thinking say.

Under intense pressure from new Prime Minister Shinzo Abe, the BOJ will likely adopt a 2-per-cent inflation target at its Jan. 21-22 rate review, double its current price goal, and issue a statement with the government pledging to pursue bold monetary easing steps, the sources say.

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By accompanying the new target with more stimulus, the BOJ hopes to show its determination to get the country out of deflation and fend off more radical demands from politicians such as a revision to the BOJ Law guaranteeing its independence in guiding monetary policy.

"The trend for prices is weak and that's a concern. The outlook for overseas economies is also highly uncertain," said one of the sources who spoke on condition of anonymity due to the sensitivity of the matter.

If the BOJ eases again, it would be the first time for it to expand stimulus for two straight meetings since 2003, when the bank was battling a domestic banking crisis amid its five-year experiment with quantitative easing that lasted until 2006.

The central bank has yet to reach a consensus on whether further action is necessary. Some officials feel the bank has offered enough stimulus for now, having loosened policy five times last year including in December.

But a growing number of pessimists fret about persistent price declines and risks to the outlook for the export-reliant economy, such as the continued slowdown in global growth and slumping sales to China following last year's territorial dispute.

In a quarterly review of its long-term forecasts also scheduled at this month's meeting, the BOJ is likely to cut its economic forecast for the fiscal year ending in March from a 1.5-per-cent expansion projected in October, the sources said.

While it may slightly revise up its economic forecast for the following year, the feeble growth projections would suggest a convincing exit from deflation remains distant – giving the central bank justification to loosen policy again.

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Government officials are also turning up the heat, demanding further monetary stimulus aside from a higher inflation target.

The BOJ set a 1-per-cent inflation target last February and eased policy via an increase in asset purchases five times in 2012 to beat deflation and ease the strain on the economy from a strong yen.

But that has failed to end nearly two decades of grinding deflation with core consumer prices, Japan's key gauge of inflation, down 0.1 per cent in November from a year earlier.

Pressure on the BOJ intensified after Mr. Abe's party won December's lower house election by a landslide, calling on the central bank to set a 2-per-cent inflation target and ease policy "unlimitedly" to achieve it.

The central bank then pledged to review its price target in January. It will likely meet Mr. Abe's calls for a 2-per-cent inflation target, although it remains opposed to setting a specific deadline for achieving that goal.

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